Northcape

Property Services


“The good oil”, an old Australian expression that refers to the practice of giving reliable, sound and truthful advice on a given subject - I thought this was an appropriate name for my blog.

The following articles have been written by me and primarily relate to retail property leasing and more broadly the retail industry in Australia. They are designed to be interesting and to assist retailers, however from time to time I will also make comments and observations about economics, geopolitics and social affairs here in Australia and overseas that I believe have a bearing on the retail industry.

All articles that I write are my own personal views and whilst I take great care when researching all subject matter, anyone reading these articles should do their own research and should not rely on any views expressed in my blog. You should always do your own independent research to satisfy yourself before embarking on any business venture.

I hope you enjoy my blog, “The Good Oil”

Cheers
Michael

Leasing…..get good advice !

Unless you own your premises, you would have a lease with a landlord so the value of your retail business is very much dependant on the quality of your lease.

If you purchased an existing business, it’s likely that you would have assigned (transferred) a lease from the original business owner to yourself. Before deciding on whether or not you should go forward with the purchase of the business, you would have undertaken some Due Diligence to determine if the business was viable and had potential – if you didn’t purchase an existing business, but started a new enterprise, you would have followed a very similar process, however in the absence of any historical data, you would have undertaken a financial viability instead.

Irrespective of whether you purchased an existing retail business or opened a brand new business, you would need to consider a myriad of issues such as;

  • Trade Area
  • Adjacent Retailers/Competition 
  • Car Parking
  • Location of Premises
  • Premises Size/Layout
  • Authority Approvals 
  • Shop Design/Fit-Out
  • Projected Turnover
  • Projected Profitability
  • Gross Annual Rent
  • Lease and other Legals 
  • Human Resources
  • Finance 

 

Of course the above list is only a small sample of the many issues to consider when establishing or purchasing a retail business. Needless to say though, they all require a specialised knowledge, so unless you have a lot of experience in these areas, I highly recommend that you engage with professionals who can help you.

Regardless of whether or not you already own a retail business or are about to open a new business, I recommend that you seek the services of the following professionals as a minimum;

  1. Lease Negotiator – if you are experienced and feel confident to negotiate a lease yourself, then you won’t need a Lease Negotiator. However if you don’t have the experience, time, inclination or just feel uncomfortable dealing with a landlord, then I recommend you engage a good Lease Negotiator. A negotiator will work with you and all your professional partners (ie. Accountant, Solicitor, Designer/Shopfitter etc…) to achieve optimal commercial lease terms.

 

  1. Accountant – a good accountant is worth their weight in gold, so it’s important that you seek sound financial advice in terms setting up and operating your business. I am not just talking about someone who simply puts together your BAS and handles  your tax returns, I am talking about partnering with a commercial business person who is able to provide prudent financial advice and help you with all manner of financial matters including dealing with financiers, minimising costs, driving efficiencies, improving profit margins etc…

 

  1. Solicitor – after you or your Lease Negotiator have agreed on commercial lease terms, it’s of paramount importance that your solicitor review the lease in detail before you execute it. Likewise if you are buying or selling a retail business, your solicitor should handle the entire purchase process including the lease assignment (or new lease if applicable) together with any other issues such as authority approvals, industrial relations issues etc.

 

  1. Designer and Shopfitter – store design is very important, irrespective of whether you are just doing a cosmetic upgrade or brand new fit-out, you need to keep your business looking fresh and vibrant. I thoroughly recommend that you engage a good shop-fitter and designer, however some shop-fitters have designers within their team which makes the process a little easier – they should be able to deliver a fit-out that meets with your landlord’s design requirements and at the same time is functional, robust and stylish. Even after your fit-out is complete, having an ongoing relationship with your shop-fitter is a good idea, as there are often maintenance issues that need attention from time to time.

 

When it comes to running a retail business, it’s important to surround yourself with professionals who know what they are doing and do it well. You know the old adage “You are only as good as the company you keep”!

 

 

 

 

Don’t accept the Status Quo….

So here we are, approaching the end of 2020 and it seems like so much has changed since the beginning of the year. A global pandemic has gripped the world and we now have a new language that includes such terms as “social distancing”, “Covid-Safe” and “Contact Tracing”.

Aside from the very real health impacts of this emergency, the economic fallout from Covid-19 has been felt in every corner of the planet, in fact according to the World Bank, global GDP is expected to contract by 5.2% this year, with major industrialised economies such as the United States contracting by over 30% just in the second quarter alone. There is now little debate amongst leading experts that the economic downturn could well be as bad or even worse than the Great Depression.

Australia has managed to avoid a major loss of life so far, however the economic consequences are being felt, especially in the state of Victoria where the Stage 4 lockdown has decimated thousands of businesses and causing deep social unrest. At the time of writing this article there is a debate raging as to whether or not the Andrews government’s response to the Covid-19 emergency was well managed – irrespective of one’s views, the fact is the economic downturn in this state is probably going to be the most severe of all the federation and likely to contribute to the Australian recession lasting longer than initially thought.

Whilst most other states and territories are experiencing lower rates of Covid-19 infections and are not in a Stage 4 lockdown like Victoria, the national economy and more specifically the retail sector is still very sick (pardon the pun). Having visited a number of shopping centres and high streets in NSW recently, it is clearly evident that there are still many retailers not re-open with more and more shops becoming vacant every day.

It is true that some retail channels have actually benefited from the lockdowns ie. “stay at home retailers” such as hardware stores, building suppliers, landscape/gardeners, electrical/electronic homeware retailers and supermarkets have all experienced a significant lift in sales due to many people spending a lot more time at home. However department stores, apparel, footwear, restaurants, cafes, lottery agents and newsagents have all been detrimentally affected – whilst the “stay at home” retail sector is currently enjoying their time in the sun, it’s not likely that this trend will continue in the medium to long term. Eventually government subsidies such as JobKeeper and JobSeeker are going to be cut off, as will allowing employees to dip into their superannuation funds. These factors together with rising unemployment, stagnant wages growth, a slowing property market and banks tightening up on lending, is likely to result in less retail spending across all sectors as we enter 2021.

Landlords are feeling the pinch too, in fact several large Real Estate Investment Trust (REITs), particularly those with substantial shopping centre assets recently sustained massive hits to their balance sheets and profits in FY20. Some of these landlords are endeavouring to navigate their way through this situation with common sense and are genuinely trying to work with retailers, however some on the other hand are putting their heads in the sand. Over the past 6 months or so I have dealt with a multitude of different landlords in connection with Covid-19 rental assistance – fortunately we were able to work collaboratively with most landlords, however some continue to be belligerent and wish to continue on as if everything is just fine – they want to maintain the status quo and do not wish to adjust their expectations according to what is unfolding in the market. However this is not the time for accepting the status quo, not by any stretch.

Unfortunately, I am still seeing offers from landlords with all manner of unrealistic commercial terms that are just not reflective of current market conditions. I have noted below some of the common requests and also detailed how I think you should respond to each of them;

  • High Asking Rents: Some landlords are still seeking major increases in rent, however rents in general should at the very least be frozen, if not be going backwards (however this is dependant of course on the specifics of your individual circumstances). Generally speaking though, I would not be accepting large rent increases at this time.

 

  • Rent Reviews: Many landlords are still seeking annual increases of base rent of 5%, however this is way too high. I would try to negotiate 2% or 3%

 

  • Turnover Rent: Most large shopping centre landlords are still asking for Percentage Rent or Turnover Rent, however I’d try to push back on this or at the very least, reduce the percentage.

 

  •  Bank Guarantees: I have noticed a real upsurge of landlords wanting 6 month bank guarantees, however this is overkill and ties up too much working capital. I suggest providing the equivalent of 2-3 months gross rent + GST only.

 

  •  Personal Guarantees: Very few landlords will accept no personal guarantees, however this is something that you should talk to your solicitor about. If possible I’d try to push back on this.

 

  •  Leasing Incentives: There is still a lingering perception from some landlords that they shouldn’t need to provide any leasing incentives (such as rent free and or capital) to sitting tenants who wish to renew their leases.The theory being the landlord has you on the hook as you have a business at risk, so they don’t need to incentivise you to stay. WRONG….in this market you should have other options, so I would endeavour to seek incentives when negotiating a new lease or renewal.

 

  • Rent Rebates: Very topical at present especially given the Covid-19 situation. Whilst the federal government and the states/territories did introduce mandatory rental assistance for retailers who sustained a specific decrease in sales in 2020 compared to 2019, the assistance while helpful was not  all that meaningful. Irrespective of the level of impact you have sustained from Covid-19 there are other underlying economic issues that were occurring before Covi-19 and will continue after the pandemic finishes. If you are in financial strife, I would press your landlord for assistance and be persistent, don’t take no for an answer.

 

For the most part I believe the majority of landlords are trying to do the right thing and are willing to help their tenants, however there are some landlords that still haven’t woken up to the “new normal”. They maintain that everything is ok, the economy is bouncing back quickly, so they shouldn’t be expected to suffer much if anything – they think everything is returning to the stauts quo. Unfortunately they are wrong, so don’t accept your landlord brushing you off in the current economic climate.

Leasing… A Brave New World After COVID-19 Coronavirus

No, I am not talking about Aldous Huxley’s 1932 dystopian novel about the future, I am referring to what is looking like the “new normal” for retail business in Australia. I don’t really like that term, as a lot of the main stream media use it far too often, however as I am writing this blog, the COVID-19 Coronavirus crisis has resulted in the forced closure of tens of thousands of retail business all over the country, so things have changed.

Of course this is not unique to Australia, the COVID-19 emergency has affected the entire globe and being handled by governments in a similar manner, however this has resulted in the world’s economy to grind to a halt.

In Australia, this couldn’t come at a worse time, as our retail industry was already in serious trouble, evidenced by the plethora of retailers who had gone to the wall recently. You know the names –  Bardot, Dimmeys, Ed Harry, Forever 21, Napoleon Perdis, Harris Scarfe and many more.

Of course much of the country was also experiencing a crippling drought, then we had an awful bushfire season over the 2019/20 summer and this was followed by major storms and floods that played havoc with electricity and telecommunications to large areas of the east coast. The last thing our industry needed was a world wide flu pandemic, I mean seriously, what are the odds of that happening?

So, here we are in April 2020 in the midst of the largest health emergency the world has seen in a century and our retail industry has been smashed for six. An optimist would say, ok the health emergency is very bad, but we’ll get through it and everything will go back to normal, right ?

Well, I am not too sure about that. Before the COVID-19 shut down of most of the developed world, the financial system was already deteriorating, so now that equity markets are in free fall, tens of thousands of companies have closed and millions of people have lost their jobs, the world is unquestionably heading towards tough times. In fact the International Monetary Fund (IMF) recently advised that the global economy has now entered a recession that could be as bad or worse than the global financial crisis of 2008/09.

So, what should you do as a retailer? Well every situation is different, however the first action I would take is to immediately investigate what financial assistance you can claim from the Federal Government and your respective State/Territory Government. There are a number of grants, subsidies and other forms of financial assistance that may help keep your business afloat.

Secondly I’d check with your insurer to investigate if your policies allows for any type of business interruption coverage.

After understanding where you sit with these matters, you’ll need to discuss your financial position with your accountant, hopefully you have some cash reserves that might buffer the impact of the downturn.

Of course your staff will be one of you main priorities, so you will need to think carefully about what you do in this area – putting off staff maybe required, but if you believe they are strong employees, I’d do whatever you can to try and retain them for as long as possible. When the COVID-19 crisis passes, you’ll need the best staff you can find to re-build your newsagency business.

Lastly you really need to consider your lease (assuming you don’t already own your shop). Now I realise that you may be tied to a long term lease and are legally bound to it, however to quote our Treasurer Josh Frydenberg, “extraordinary times call for extraordinary measures”.

If you are a tenant in a shopping centre or other commercial property and have a legally binding lease on foot, generally speaking you are not entitled to unilaterally adjust the rent down permanently to a level that you think is acceptable. That said, if you have had to close your business or only been partially trading due to the restrictions imposed by the authorities, your turnover has probably decreased substantially. The Federal Government has recently introduced a new Code of Conduct for commercial tenancies and the various states & territories are in the process of introducing legislation that rides on the back of the Code – they will provide a framework for short term rental assistance that can be sought from the landlord.

Given the extraordinary circumstances we are dealing with, I believe most landlords will consider helping you with some form of rental discount in accordance with the new Code, however it was only ever designed as a short term measure. It is highly probable that the economy for the remainder of 2020 and beyond will be very tough, so it is time to seriously  think about how sustainable your lease is in the long term.

Putting aside any short term assistance that you may receive, I strongly recommend that you critically review your rent and if you believe it is just not sustainable in the long run, you should talk to your landlord about possibly re-negotiating your lease. In most cases this will be very difficult, however this is not the time to be blindly accepting the status quo of anything – when the Coronavirus emergency passes (and it will pass), we are more than likely going to experience a deep recession, so I think you should have a frank conversation with your landlord.

It’s a brave new world….

 

 

 

 

 

 

 

 

 

 

 

 

How is customer service relevant to your lease ?

How important is customer service to your retail business? Most owners would say that good customer service and strong relationships are fundamentals of running a successful business. Seems obvious, right? Well in theory yes, but in practice there are plenty of shoppers who have encountered poor customer service at some point in their lives. As a retailer this should be abhorrent to you – of course retailers are human, we all have off days when things just don’t seem to be going our way. There are myriad of reasons for this, including personal issues such as financial stress, relationship problems, health challenges etc…however we must try to shield our own personal issues from customers.

The reality is your customers have their own personal issues to deal with, so the last thing they want to hear is you grizzle about how quiet trading has been during the past few days or how your landlord is unreasonable. Whilst some of your customers may sympathise with you on the surface, they really aren’t that interested and are probably just being polite.

With nearly 30 years in the retail industry having worked on the landlord side of the equation for most of that period, I encountered many retailers who would otherwise have had strong businesses, had their customer service skills been up to scratch. During my daily walks around my shopping centre as a Centre Manager, I would often chat to retailers about how business was – whilst most retailers were even handed with their feedback, some negative retailers blamed all their woes including falling sales and declining profits on everyone else (including their customers) – they did not think for one moment that the source of their problems may have lied with themselves!

Imagine blaming your financial performance of your business on your customers – I remember hearing all manner of crazy explanations such as “old people just don’t buy enough product” and “my customers are very price conscious and don’t like paying a lot” and “customers these days just don’t have any loyalty”. Instead of blaming the very people who they relied on to generate sales and by definition, their livelihood, these retailers should have taken a good hard look in the mirror and asked themselves – I am the problem, does my negative attitude and that of my staff stink ? Are we providing poor service?

In the shopping centre industry we would often gauge customer attitudes towards individual retailers, through research that included exit surveys and focus groups carried out by independent third parties – funnily enough the vast majority of those retailers with the lowest customer feedback scores were the same retailers who’s sales were declining and often corelated with their rent payments falling behind.

In each of these cases I believe the retailer had simply missed the mark in terms of meeting the wants and needs of their customer – they weren’t focused on looking after the very people that they needed to satisfy.

From a landlord perspective, especially within a shopping centre environment, it is fairly obvious which retailers have good customer service and those who do not. As mentioned there are plenty of indicators such as poor sales, climbing rental arrears and badly maintained stores. In many cases landlords also receive direct customer feedback from shoppers who simply walk into the Centre Management office and complain about how poorly they have been treated.

When it comes to renewing a lease, most landlords will not look favourably upon a retailer who exhibits poor customer service, as more often than not this same retailer is not likely be meeting their obligations under their lease. If the landlord has an opportunity to replace this retailer, they may not offer a new lease to the incumbent operator meaning their business would be impacted significantly.

So remember, good customer service is integral for so many reasons, including the security of your leased premises….

 

 

 

 

 

 

Negotiating a lease….know your business

During the course of negotiating leases on behalf of my clients, I am often asked all manner of questions such as where is the best location for my business, what size premises are ideal, how much rent should I pay etc…?

I am always happy to provide recommendations about such matters, however it really is up to my clients to understand their own business model and have clear views on these types of issues.

Successful retailers usually have a very strong understanding of what works and what doesn’t work in terms of trade area, shop location, size of premises, orientation/shape of premises and acceptable gross rent. They are able to accurately assess a given trade area to determine how their product/service will be accepted and will often have a specific formula for determining how many transactions are likely to occur and the average sale per transaction.

Once a retailer has determined the level of annual sales that can be achieved, they will work backwards to calculate how much gross rent they can afford. This will be determined by the level of gross profit the business is likely to generate – a low gross profit business such as a newsagency can only sustain a low rent to turnover ratio of around 5-8%. Of course the inverse is true for a high gross profit business such as a jeweller, as they can sustain much higher rents.

It is not uncommon for successful retailers to own more than one retail business, so these operators are easily able to draw upon their experience and historical trading data to create a system that works for them. Over a period of time these owners develop an intimate understanding of all aspects of their business, so when it comes to negotiating a new lease, they intrinsically know their metrics and limitations. Being intimate with the metrics of your retail business is therefore imperative, otherwise you can fall into the trap of signing a new lease that just doesn’t work for you.

Over the past 5-10 years the retail sector has been under attack from a myriad of factors such as on-line retailing, increased competition from new players in the marketplace, low  wages growth and high household debt. As a result, many retailers have fallen over which has resulted in increased shop vacancy rates, so landlords have struggled to grow rents and keep a lid on vacancy rates, especially in regional areas.

Of recent time I have noticed a trend emerging with many landlords pressing retailers to  take on larger spaces, no doubt due to the difficult leasing market. On many occasions I have had to persuade landlords not to push my clients into taking unnecessary space, when they clearly have no need for it. Generally speaking the larger the space, the greater the rent (not to mention additional cost of fitting out and stocking these premises), so it’s not necessarily in your interest to take space in excess of your requirements.

Landlords often offer leasing incentives such as rent free and/or capital to encourage retailers to take more area, however this can be perilous. If the shop area is much larger than what you require, you are may end up paying a higher long term rent that is not sustainable, as well as possibly creating major stock issues, both of which can lead to severe financial distress.

If you are planning to enter into a new lease, I highly recommend that you thoroughly analyse your business, know your metrics and develop a clear set of leasing parameters and try not to deviate from them.

 

 

 

 

Location, location, location …

I was recently appointed to act on behalf of a retailer who had been having difficulty negotiating a new lease with his landlord on a potential new site within his shopping centre.

Up until my appointment, communications between the two parties had completely broken down. Whist both sides were keen in principle to relocate this particular retail business to a better location within the centre, they just couldn’t come together on the commercial lease terms.

On reviewing all of the facts surrounding the situation, I learned that this retailer had quite a strong business, but it was currently located at the far end of the shopping centre, with no major tenants nearby. This section of the mall was about to be redeveloped and the retail tenancy mix altered to the point where I thought staying in the existing location would have been detrimental to my client.

By contrast, the alternate location proposed by the landlord was very close to a strong supermarket trading at over $50M pa – the surrounding precinct was also going to be refurbished and would soon include a second supermarket which would undoubtedly generate a huge amount of foot traffic.

Whilst my client agreed that the proposed new site was a better location, he was very agitated about the fact that the landlord wanted 50% more rent for the new site. The interesting fact was that this retailer still had about 2 years remaining on his existing lease, so the landlord was quite content to leave my client in his existing shop, unless he was more realistic about paying a market rent for the new site. Importantly this was not a forced relocation, the landlord just thought that offering the new site to my client was the right thing to do – it was good for him, good for my client and right for the centre’s tenancy mix (something which I completely agreed with).

Before I commenced negotiations with the landlord, my client and I had a robust debate about what we thought was a fair market rent. My client cited lower rents that other retailers where paying throughout the centre, so he could not accept that the landlord wanted to charge more rent just because he was making improvements to the centre.

Of course my objective is to always achieve the best possible commercial deal for my client, but the best deal doesn’t always mean securing the cheapest rent, it means securing the best possible location on the best commercial lease terms.

I did think that the landlord’s asking rent for the new site was on the high side, but not to the same extent as my client. The other important fact that my client kept glossing over, was that this was not a market review, nor was it a forced relocation, so the landlord had absolutely no obligation whatsoever to offer the new site or negotiate the rent. In fact the landlord could ask for whatever rent he desired as my client was already bound to a legally binding exisiting lease for a number of years.

I had to confront my client and be honest with him, so I asked him a few simple questions;

  • Which was the better location in terms of adjacent major retailers, the existing shop or the proposed new site?

 

  • Which location would have the highest foot traffic?

 

  • Which location was likely to generate incremental sales and profit growth ?

 

  • Which location was going to increase the profile of his business medium to long term?

 

  • If you don’t embrace this opportunity and be more realistic on the rent, what is the long term future of your business in the current location?

 

I am sure that you can guess what my client’s response was, of course the new location was superior in every way, so my client started to realise that he should be more realistic about how much rent he could pay. Remember, the landlord didn’t actually have to offer the new site to my client, so I reminded him of this fact and the alternate future if he stayed in the old location.

In the end we agreed on revised leasing parameters and I successfully negotiated what we both thought was a good lease deal on the new site. I managed to reduce the asking rent by 20% (in addition to gaining some leasing incentives) but yes, the new rent was higher than the current shop’s rent, but in our opinion it was worth it. We had secured one of the best locations in the shopping centre and my client was confident that increased profits that he would generate from this new site, would more than cover the new rent, many times over in fact.

We secured the future of his business by observing an old real estate maxim, “always go for the best location !  Location, location, location……” !

 

 

 

 

 

Media Spin…..

I haven’t written a blog for a while, due to a number of reasons not the least being the growth of Northcape. We have been growing strongly and are presently in the midst of moving into a larger office and hiring new staff, so it is all very exciting.

Like most of you, I have been watching what has been happening in the retail industry, particularly over the past 12 or so months and just could not sit by any longer without venting my anger and dismay over “spin” coming out of the main stream media.

I don’t want to be a purveyor of doom and gloom, but the Australian retail industry is doing it tough at present – there are a number of reasons for this, not the least being new international competitors and a few successful local operators taking market share, however I think the biggest issue is that consumers are loaded up with too much debt and are simply not buying and consuming as much as they used to. Wages haven’t moved in years and the real unemployment rate is probably around 10% not 5.7% as the media tells us.

With the recent reporting season just finished, anyone would think that the Australian economy is doing great, but once you scratch the surface, it’s not that good at all.

I recently read an article about how strongly a certain retailer’s share price “surged” and this led to the ASX moving higher. After reading another article about this same retailer’s actual financial results for the half, it turns out that underlying profit had dropped significantly and as a result, dividends were going to be slashed. Apparently their share price surged (up 4%) – perhaps investors thought that the worst was now behind them, I don’t know. From reading the headline article though, anyone would think that the company had a cracker of a year, but the complete opposite was true.

I also read some other headlines about a major retail landlord who apparently had another excellent result (given the state of the industry, I actually think they did do an excellent job of managing their business), however it wasn’t because of strong revenue growth, it was mainly due to cutting overheads and lower interest rate costs. Again when I read the headlines, it sounded like the retail industry was chugging along very nicely and retail was strong – what utter nonsense !  Whilst this particular retail property group is in my opinion a very good manager, the fact was revenue was down on last year by millions and millions of dollars.

Why would this be….. would it have anything to do with several large retail chains going to the wall over the past 12 months or perhaps many prudent retailers re-negotiating their rents down ? Last year about a dozen large retail groups collapsed (you know the names.) – since the beginning of 2017, five more retailers have either gone into administration or liquidation and word on the street is, there are more likely to fall over in the first half of this year.

There were many other retailers and other companies in different sectors who on the surface had very positive financial results for the half to December 2016, but after drilling through the detail, most of these companies had significant decreases in underlying profit, but why was this so?

I believe it is because the Australian economy is in pretty serious trouble and the retail sector by extension, is also. We are heavily burdened with debt, governments and households alike, in fact Australian household debt to income ratio is now nearly 190%, the highest on record and one of the highest in the world !

Australian national government debt is now well over half a trillion dollars !!! If you follow main stream media commentators, they all say that this manageable and much lower proportionally to many other advanced economies around the world. What a warped view that is…. it just means most of these other country’s governments are hocked up in way too much debt and we just happen have a bit less, yeah very encouraging.

The sooner we face up to the reality of what is happening, the sooner we can take action to try and arrest the problem – unfortunately with all the uniformed dribble coming out of the main stream media, most people believe everything is great, there’s nothing to worry about, we can just keep racking up the credit card, it’s all good.

My tip for the main stream media is, stop the “spin”, you are only adding to our financial problems !!!!!!

 

 

 

 

 

 

 

 

I need a rent reduction or do I….?

One of the most common questions I am asked by retailers is how to negotiate a rental rebate, even though they have a binding lease on foot.

In this blog I thought I would provide my thoughts as to how to approach your landlord for rental assistance, but before I do I think it is important that we first explore why and if a retailer might need a rebate in the first place. Whilst I am a retailer’s advocate, I think it is important that we are honest with ourselves when considering knocking on the door of a landlord to ask for financial assistance. When I say honest, I mean taking a good hard look at your business and asking yourself, “is the level of my rent the real issue or is my business fundamentally lacking in other areas”.

A client once asked for my advice about seeking a rental rebate from his landlord, as he felt that this would significantly improve his bottom line. After drilling down into his financials, I learned that his business’ annual turnover was about $180,000 and that it had made a loss of about $40,000 the previous year. His gross rent was just over $24,000 pa, however he was adamant that his rent needed to decrease as it was far too high and was the root cause of all of his woes.

Whilst I wanted to help my client from a leasing perspective, it was very obvious to me that the real issue wasn’t rent, it was a fundamental problem with the business itself. Annual turnover was way too low, in fact my client later admitted that that sales for this particular retail business should have been around $1-1.2M pa, rather than $180K pa, especially as it was positioned in a good location on a busy high street with lots of passing shoppers and no serious competition.

In my opinion no amount of rent rebate was going to materially improve my client’s financial position. If his landlord agreed on a 50% or even 75% permanent rent reduction, it would still mean that my client would make an annual loss of $22,000 – $28,000 based on the previous year’s performance.

In this particular case I advised him to actually not focus on a rent reduction at all, as this was only scratching the surface and really a distraction. I suggested that he needed to take a much closer look at his operation (after seeing the shop for myself, it was pretty obvious why turnover was so low – I don’t want to be disrespectful, but the state of his fit-out was appalling, I’m talking about cobwebs, blown lights, paint peeling off the walls, worn carpets and very low stock levels. To compound the issue further, his customer service was even worse than the state of the fit-out!  It was very obvious, this was not a rent issue, this was an operational issue, so in the end I recommended that he seek the advice of a very successful ex-retailer associate of mine, who had set up a consultancy business that assist troubled retailers.

In this particular case a rent reduction wasn’t really required, but of course there are situations where securing a rent rebate is appropriate and in fact, should be an expectation;

• In a shopping centre environment, where a landlord is conducting a major re-development and during the course of construction, they impact your business. In these circumstances most states and territories in Australia have legislation in place that permits tenants to claim compensation and that includes rental rebates.

• If your leased premises are unable to be occupied due to some form of natural disaster such as fire, earthquake or flood, many leases allow for rent to abate for a period of time.

• On rare occasions again in a shopping centre environment, if there is a significant change with one of the major tenants, this can have a very serious impact on traffic flow. A loss of a major tenant such as a large supermarket can significantly impact the surrounding specialty shops within the shopping centre.

So what about the situation where you actually have a strong, vibrant business that has a reasonable turnover, however you are struggling to make a profit and are fairly certain that you are paying a much higher rent than many of your neighbouring tenants. Even though you have a lease in place, I do believe it is worth talking to the landlord, however you need to consider the following;

  • First of all we need to understand the perspective of the landlord. Whether they are a small private investor or a large listed property trust (REIT), their objective is to make money. We shouldn’t begrudge landlords for this, as they are in business just like you are, so we should never treat them as the enemy.

 

  • The second issue to consider is the landlord has no legal obligation to reduce your rent (presuming you have a binding lease and don’t have any extraordinary circumstances such as those noted above).

 

  • The next question to ask yourself is “what’s in it for the landlord ?”. If they agree to a short term or permanent rent rebate, what is the impact to their bottom line and why would they accept this. Broadly speaking and depending of the valuation of their property, for every $1 in permanent rent reduction that a landlord gives a tenant will result in $10-$20 decrease in the value of their property. Doesn’t sound like that such impact does it ? Well lets look at an example where a retailer located in a small shopping centre is not trading very well and is seeking a $10,000 pa decrease in rent from their landlord. Using that same multiplier effect as noted above, the impact to the landlord’s valuation in this case is 10 times, so their asset value will be effectively decreased by $100,000 if they agreed to a permanent decrease. In the landlord’s mind the tenant is asking for a rent reduction that results in them losing $10,000 pa in cash flow, but more importantly it also reduces the capital value of their shopping centre by $100,000 ! The landlord is not going think that this is a $10,000pa question, they will think of it as a $100,000 question.

 

To counter resistance from a landlord, I will often recommend to my clients that they start by asking their landlord for a short term rebate (initially) for 3 months as a short term rebate doesn’t normally affect a landlord’s valuation just their cashflow, so they might be more responsive. However when that period expires, I encourage them to go back again for another 3 months and the same again in 3 months and so on. Eventually, we ask the landlord to make it a permanent arrangement, (a bit like cooking the frog so to speak).

Sometimes a landlord will agree to a permanent rent reduction, however you might have to trade off something of value to them. For example the landlord might agree to a major rent reduction but he may want you to take a new long term lease or perhaps they make wish to take back some area from your shop or they may want you to do a full refit of your premises. Of course you have to consider these types of trade offs on their individual merits, but often there can be a win/win outcome.

The key principle to bear in mind when seeking a rent rebate from your landlord is determining what you can trade off, so it is vital that you understand what your landlord is thinking and what is important them.

 

 

 

 

 

 

Do I need a professional lease negotiator…?

I was recently speaking to a potential client about representing him in lease negotiations and the inevitable questions arose as to why he should use my firm’s services and what could we achieve for him. Very fair questions, in fact I think all retailers should be upfront about assessing what results they can expect from their service providers, be it a solicitor, an accountant or perhaps a lease negotiator.

Upon talking further to this particular retailer, it was obvious that he was a very experienced businessman with many years in the retail industry (amongst other industries) and had previously negotiated several leases in the past. It appeared that he had plenty time on his hands and the ability to negotiate his lease renewal with a high level of competence, so I suggested that he probably didn’t require my services and recommended that he negotiate the lease himself.

Whilst I was quite confident that I could probably negotiate better commercial lease terms (I had a close relationship with his landlord), I actually think that he secretly wanted to do the deal himself as a personal challenge.

However not everyone has the experience, time or inclination to negotiate a lease themselves, so there are good reasons to appoint someone who negotiates leases for a living;

  • Arms Length – having a professional negotiate for you allows you to be at “arms length” with the landlord, so you can make partial decisions without feeling pressured at any time.

 

  • Market Intelligence – a good lease negotiator will have an understanding of your industry and be abreast of the type of deals being done in the market place.

 

  • Industry Network – this is more relevant if you are located in a shopping centre, however a good lease negotiator should have strong working relationships with most of the large retail landlords and as such, have a better chance of obtaining an optimum result for you.

 

  • Experience – most landlords be it large retail giants such as Scentre Group, Lend Lease, Stockland etc..or smaller landlords have professional leasing executives/leasing agents acting for them. Their sole focus is negotiating leases, day in day out. Many of these leasing executives will negotiate 30, 40, 50 up to 70 deals a year, so they are usually very good at their job. In contrast, most retailers would negotiate a lease once every 5 years, so in many cases these professional lease negotiators have an unfair advantage in terms of experience. Having a professional lease negotiator on your side, evens up the odds a lot more.

 

  • Optimising the deal – many good lease negotiators have worked on the landlord side of the equation at some stage in their careers. As such they should know how to push a deal in terms of rent, what incentives are able to be secured and when to close the deal or walk away. They should be able to drive the deal hard, as they simply have a lot of experience and are focused on a good outcome. This is especially so if the fee arrangement is based on achieving specific outcomes such as negotiating a lower rent and/or securing capital contributions and rent free periods.

 

  • Time (Opportunity Cost) – just like the old 1965 Ned Miller song says, “do what you do well”. Staying focused on your business and leaving lease negotiations to a professional, makes a lot of sense from a time & productivity perspective.

 

Even though there are plenty of compelling reasons to have a professional lease negotiator represent you, sometimes it is simply not worth it. For example if you are about to renew your lease and your existing rent is very low and not likely to increase significantly, then it may be more prudent to simply negotiate the lease yourself.

If however you are trying to renew your lease or starting a fresh lease and there is a strong likelihood that your rent will increase a great deal or you are going to have to pay for a costly fit-out then it is probably a good idea that you seek help from someone that negotiates leases for a living.

Permitted Use……getting it right!

Over the past few months I have come across some interesting cases where clients of mine have had major disputes with their landlords about their Permitted Use.

Permitted Use within the context of a retail lease, defines what a lessee is allowed to sell, so it is very important that the clause is carefully constructed to encapsulate all the desired products and services within the retailer’s range, both now and into the future.

This is especially important for retailers located within shopping centres, due to retail landlords being very particular about their tenancy mix. Generally speaking shopping centre landlords prefer usage clauses to be well defined and very narrow, so that they can control exactly who sells certain products & services.

On the hand smaller independent landlords with one or two free standing specialty shops, are usually a lot more relaxed about Permitted Use clauses, as they are generally not concerned about tenancy mix. If your business is located in free standing specialty shop, nine times out of ten, your landlord would not care nor be aware of what products and services you sell (provided of course they are not wildly out of character).

In a shopping centre environment, the situation is very different – in fact the cases mentioned above, all involved shopping centre landlords trying to restrict retailers from selling specific products and services.

Given challenging conditions facing the retail industry at present, any unnecessary restriction of products and services in your business, could have a detrimental impact on your sales and bottom line profit, so I thought I would explore how you might overcome such problems.

When you next renew your lease or enter into a new lease, one of the very first steps I recommend is to determine what your business is going to look like. By this I mean what are the core competencies of your retail business and what range of products/services are you going to specialise in (eg. I had a newsagent client that was located next to a number of art schools and over time he developed a very close working relationship with these schools and became their primary supplier of art materials. He supplied all manner of items such drawing pencils, fine paint brushes, canvasses, easels etc – he developed a real niche in addition to his more traditional newsagency lines).

Once you have determined what your specific niche is and you are clear about what your business is going to look like, then it is important that you create a Permitted Use clause that covers all of your desired products and services, but has enough flexibility in the wording to ensure that you are not restricted to just those products and services. The reason being that you might like to add or vary your range at a later date, in order to meet future customer demand.

If possible try to use phrases such as “ including but not limited to, retail sale of x,y,z and other products & services normally associated with a…….. ”. Of course you don’t have to use this exact wording, but it is important to use words that are general in nature, so as to give you maximum flexibility.

More often that not, you will have to haggle with your landlord in regard the final wording of your Permitted Use clause, however it is far better to resolve this at the time of negotiating a new lease, rather than becoming embroiled in a major dispute after the lease has been entered into.

What if you have a lease on foot with a Permitted Use clause that is a too narrow and your landlord wants you to reduce or remove certain products/ services that have been part of your range for some time?

Well, this is more challenging, however I wouldn’t immediately give in to your landlord’s demands – when a landlord requests that certain products/services be reduced or removed, it is often a result of another retailer complaining about you selling the same or similar merchandise. If you find yourself in this situation and your Permitted Use clause isn’t strong enough, I recommend that you organise a meeting with your landlord (or Centre Manager/Property Manager) and try to find a compromise. Often there might only be one or two key products that are controversial, so the solution might be as simple as removing these few items from your range or even relocating them out of prominent display. Of course sometimes it’s not that simple to find a quick solution, in which case it may be worth your while to appoint a professional lease negotiator or a good solicitor to help you resolve the dispute.

Of course it is far better to create a good Permitted Use clause at the time of negotiating a new lease, to avoid problems in the future.

 

 

 

 

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